A venture capital trust can provide investors with an opportunity to invest in some of the UK’s most exciting smaller companies.
The vehicle gives investors the chance to play an important and active role in supporting the next generation of UK businesses.
Financial advisers should analyse the VCT market thoroughly before recommending them, says Jack Rose, business development director for tax products at LGBR Capital.
There are a number of sources such as The AIC, Tax Efficient Review, Tax Shelter Report, MiCap, Best Invest and Hargreaves Lansdown, which Mr Rose says all provide a good deal of useful research and information.
In terms of suitability, Mr Rose says firstly VCTs should be considered on their investment merits rather than simply as a way of accessing tax reliefs.
Given their focus on smaller, less liquid companies, Mr Rose says VCTs will not be suitable for everyone.
However, for those UK tax payers that can accept a higher level of risk and the minimum holding period of five years, Mr Rose says VCTs can play a useful role in their portfolio.
He says: “The 30 per cent upfront tax relief makes VCT suitable for clients looking to offset a large income tax liability.
“VCTs can also provide an option for investors seeking tax-free capital gains, especially if they have already maxed out their Isa and pension contributions for the year.
“Furthermore, because they offer tax-free dividends, the majority of VCTs will focus on providing regular income alongside capital gains. As such, VCTs can complement an investor’s income portfolio.”
Chris Hutchinson, manager of the £120m Unicorn Aim VCT, says: “VCTs are sometimes mistakenly considered as being solely focused on achieving returns through capital growth, but in reality many VCTs deliver attractive returns via regular tax-free dividend payments.”
Paul Latham, managing director at Octopus Investments, adds that VCTs should be considered by those looking for investments that are capable of generating additional income, or looking at ways to complement existing retirement plans, especially in light of ongoing changes to pensions.
Over the years, Mr Latham says VCTs have become increasingly popular with investors as part of a diversified portfolio.
In the 2014 to 2015 tax year, according to the Association of Investment Companies, VCTs paid £240m in dividends to investors, the highest dividend pay-out since VCTs began.
According to Hugh Rogers, business development director at Puma Investments, a moderate risk, growth-orientated investment portfolio, for example, might hold up to 25 per cent in smaller companies, which can include VCTs.
Mr Rogers says VCT investments should also be considered after an investor’s Isa allowance and pension contributions for the tax year have been made.
If an investor has made provision for these allowances and still wishes to invest into VCTs, Mr Rogers says they need to be aware that while the minimum holding period for a VCT is five years, generalist VCTs should ideally be held for seven to nine years, in order for the underlying companies to show their potential.
With VCT investment limits from as little as £5,000 per person, Mr Rogers says it is also easy to diversify across a number of different VCTs to help spread the risk of investing.
